Regulatory structures have been a barrier to doing business across the Middle East and North Africa and lack of coordination between regulators has held back industry development. MENA Fund Review spoke to Imtiaz Shah, partner, and Warren Thomson, of counsel, of Hogan Lovells International, and Marc Parrott, senior associate at Campbells, about legal developments across the region.
Across the GCC region which country has the best legal framework from an investor perspective?
Imtiaz Shah and Warren Thomson: There are currently only two substantive collective investments regimes in force in the GCC - the Dubai International Financial Centre (DIFC) in Dubai and Bahrain. Other GCC jurisdictions do not currently have specific laws governing funds and therefore there is a degree of uncertainty surrounding the rights of investors in those funds. From an investor perspective, therefore, the DIFC and Bahrain are currently the most appealing fund jurisdictions in the GCC.
Of these, funds in the DIFC are regulated by the DFSA. The laws governing funds and their regulation are based on their equivalents in England; therefore investors familiar with funds in the UK or US should be comfortable with the DIFC regime. Funds in Bahrain are governed by the Central Bank of Bahrain. They are popular with GCC investors, partly because these funds are treated as being in the GCC and therefore able to take advantage of favourable tax treatment in countries such as Saudi Arabia.
Marc Parrott: The Dubai International Financial Centre provides a legal framework, being based on English law, which will generally seem "most familiar" to western investors.
For example, this framework allows for the creation of the types of entities, such as companies and limited partnerships, with which such investors will be familiar.
The Dubai Financial Services Authority, as a financial regulator, is also modeled on its UK equivalent, the Financial Services Authority, as is the DIFC Court system.
The fact that this legal framework also operates with English as its official language also makes it far more accessible to international investors.
Notwithstanding the above, in many instances institutional investors will find jurisdictions such as the Cayman Islands to be preferable for the domiciliation of their investment structures based on the cost, timing and flexibility advantages afforded.
As the Cayman Islands provides stable government, clear rule of law, respect for property rights, a reliable court system with ultimate rights of appeal to the UK Privy Council (and, thus, the benefit of hundreds of years of accrued jurisprudence on which to base the likelihood of success in any legal action in a consistent and reliable manner) and access to sophisticated advisors, all in a tax-neutral and low-cost jurisdiction, it is often considered the de facto standard jurisdiction for the domiciling and structuring of vehicles for investment by institutional investors.
What legal issues are there on the horizon that asset managers should be aware of and how should they be preparing for them?
Imtiaz Shah and Warren Thomson: The Qatar Financial Centre has a collective investment regime which is still nascent. There are drafts of a collective investment law in Saudi Arabia, which has yet to be enacted, and proposals for such laws have also been put forward in the UAE and Kuwait. Consequently, there may soon be differing funds regimes covering the GCC, and managers will need to be aware of the differences between them.
In particular, when selling securities in foreign investment funds into the region, it may not be possible in the future to take advantage of what has previously been seen as a relative lack of regulation over the marketing of such funds. Managers will increasingly need to look at the markets individually rather than, as is often the case, a single under-regulated market for fund raising.
Marc Parrott: This really depends upon the jurisdiction in which the asset managers have their operations or seek to market their fund products.
Most asset managers with operations in the US are currently focused on the imminent deadline for affecting their registration with the SEC. This requirement can also impact asset managers without operations in the US but who have US investors in their funds.
Asset managers in Europe and the UK are focused on the AIFM-Directive of the EU Council.
Asset managers should be engaging with their legal advisors to determine whether any of these issues impact their particular business.
What effect have the Arab Spring and the global financial crisis had on the development of regulations across the region?
Imtiaz Shah and Warren Thomson: This has had two main effects - first, the general uncertainty has slowed fund raising and investing in the region. However, this slowdown has receded in the last few months as the position in the region has stabilised. Secondly, as, in the context of the GCC region, the unrest has hit Bahrain the hardest, we have seen a slowdown in fund activity in Bahrain and this is also a factor in the general slowdown. Again, the position appears to be stabilising.
What regulatory/legal changes would you most like to see happen in the region?
Imtiaz Shah and Warren Thomson: As many fund managers view the GCC market as a homogenous whole, and when fund raising or investing they tend to look across the countries of the GCC, a harmonised or consistent set of collective investment rules across the GCC will help to attract investment and ease issues and uncertainty in fund raising.
The implementation of co-ordinated collective investment regimes in the region will help remove existing ambiguity and bring the region into line with more developed markets.
Marc Parrott: I believe that the implementation of a proper private placement framework in countries across the region, in order to allow the marketing of interests in investment funds to institutional, high net worth and/or sophisticated investors in the same manner as such marketing is permissible across the US, UK and most of Europe would be very helpful to the growth of the investment management industry in the region and would also allow appropriate persons in the region greater access to invest with international investment managers outside the region.
As Cayman Islands attorneys, we regularly work with asset manager clients seeking to market investment structures domiciled in the Cayman Islands.
There is a clear distinction with respect to the clarity with which such private placement of fund interests can be undertaken in the US, UK and Europe as opposed to the MENA region.
To the extent that countries across the MENA region could not only adopt such private placement regimes, but could also do so in a consistent manner, it would be even more helpful to the asset management industry.
Which country has the greatest legal/regulatory barriers, and what progress being made on removing these blocks on the asset management industry?
Imtiaz Shah and Warren Thomson: There are a number of barriers that are common to countries around the GCC - for example, restrictions on foreign ownership of certain asset classes, restrictions on the ability to sell foreign funds into the jurisdiction etc. Kuwait, Saudi Arabia and Qatar are relatively more difficult to sell funds into than the UAE, Bahrain and Oman.
What are the most important legal/regulatory factors from an asset manager perspective?
Imtiaz Shah and Warren Thomson: These include: speed/costs of set up; restrictions in investing in certain asset classes; restrictions in exiting investment; clarity on the legal and contractual rights of investors and managers/operators of a fund; and ease of marketing/selling fund units.
Marc Parrott: Stable government, a clear respect for the rule of law, respect for property rights, and a reliable court system that functions in a consistent and reliable manner and without undue bias are all important base factors in determining whether any particular legal/regulatory framework is attractive.
Above these basic requirements, and specific to an asset manager's perspective, I would suggest that the cost and required timing to launch new products would often be the most important factors in assessing the attractiveness of any legal/regulatory framework.
In addition, flexibility in terms of permissible investment strategies, including as regards such matters as permitted diversification/concentration, use of short-selling, use of leverage, and use of derivatives, swaps and other sophisticated investment products would be considered important factors in assessing any legal/regulatory framework.
Whilst most asset managers would accept that there is a benefit in regulation of the industry, all would agree that over-regulation is counterproductive and causes compliance costs become unnecessarily burdensome. Accordingly, there is a requirement for constant balancing of the benefits of further regulation against the increased costs of compliance (which, of course, are ultimately borne by fees paid by investors).
What factors are holding back regulatory development in the region?
Imtiaz Shah and Warren Thomson: A lack of co-ordination by regulators across the GCC; differing commercial, legal and philosophical approaches to funds in different GCC jurisdictions.
How do you see the regulatory environment of the MENA region developing in the next three years?
Imtiaz Shah and Warren Thomson: It is likely that we will see specific collective investment regimes in most, if not all, GCC jurisdictions. This will create a more complex legal and regulatory environment in which funds and managers will have to work. We hope to then see a relaxation of the regime, or entrenchment of a statutory exemption, for certain sophisticated/professional investor funds in the region to create an 'offshore' environment to facilitate business from offshore fund centres such as Cayman and BVI.
Marc Parrott: I would like to believe that stable government, a clear respect for the rule of law and respect for property rights will become the standard across the MENA region.
This will serve as a foundation for the growth of capitalism and greater prosperity across the region. This growth and prosperity will fuel the investment returns on which the asset management industry survives.
© MENA Fund Review 2011
